Edited version of your private ruling

Authorisation Number: 1012549900630

Ruling

Subject: Years of service

Question

Do your years of service for the purposes of determining the tax-free part of a genuine redundancy payment include prior periods of employment with the firm?

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

During and after your studies you were employed on and off by the firm in various roles.

In the 200X income year the firm changed its name and you were you were appointed the leader of one of the firm's business unit.

In the 200Y income year you became a partner of the firm.

The firm subsequently integrated with a foreign organisation and changed its name.

In the 20XX income year you took up the role of director within the firm. The role was initially for a contract of 12 months. This was extended further to determine whether a permanent role for you existed.

In the relevant income year you were advised your role was no longer required and your employment ceased.

After a dispute with the firm regarding the termination of your employment a settlement was reached under a deed of release (the Deed)

The Deed specifies the term 'Employment' as your period of employment as director of the firm.

Under the Deed a payment will be made to you comprising:

· A gross payment in lieu of notice;

· A gross severance payment in accordance with National Employment Standards;

· A gross additional termination payment.

A document prepared by your former employer to calculate the tax to withhold on your payment only takes into account your period of employment as director of the firm.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Subsection 83-175(2).

Income Tax Assessment Act 1997 Subsection 83-175(3).

Income Tax Assessment Act 1997 Subsection 83-175(4).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Subsection 83-170(3).

Income Tax Assessment Act 1936 Subsection 27A(1).

Income Tax Assessment Act 1936 Subsection 27A(19).

Income Tax Assessment Act 1936 Subsection 27F.

Reasons for decision

Summary

It is clear that the payment relates only to your role as director of the firm. The payment does not take in account your previous employment with the firm.

Detailed reasoning

Genuine redundancy payment (GRP)

The requirements for a payment to be a genuine redundancy payment (GRP) are outlined in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).

Tax-free amount of a GRP

The tax-free amount of a GRP is not assessable income and not exempt income, as provided for in section 83-170 of the ITAA 1997. Any amount of a genuine redundancy payment in excess of this tax-free amount worked will be taxable as an employment termination payment. This is so even where the amount is received more than 12 months after the termination.

Under subsection 83-170(3) of the ITAA 1997, the formula for working out the tax-free amount is:

Base amount + (Service amount x Years of service)

In calculating the tax-free limit for the 2013-14 income year:

Base amount means $9,246;

Service amount means $4,624; and

Years of service means the number of whole years in the period, or sum of periods, of employment to which the payment relates.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 at paragraph 4.61 states:

The tax free part of a payment is determined by reference to a base amount plus an amount per year of service. This replicates the existing concession offered to such payments.

In discussing the meaning of the term years of service, the explanatory memorandum to the Taxation Laws Amendment (Superannuation) Act 1992 (the EM) which inserted the former subsection 27A(19) into the Income Tax Assessment Act 1936 states:

The relevant period of completed service is the same as the period defined in paragraph (a) of the definition of eligible service period in subsection 27A(1). That is, the period, or aggregate of the periods, of the employment to which the payment relates. However, eligible service period is expressed in days, while the service period for subsection 27A(19) purposes is expressed in whole years.

Generally, the years of service will be the employee's most recent continuous period of employment with the relevant employer making the payment. Non-continuous periods of employment with the employer or a related employer can be taken into consideration in calculating the years of service provided the payment is made in recognition of that earlier employment and/or related employment.

In this case, the payment was made under a deed of release (the Deed). The Deed specifies the term 'Employment' as your period of employment as director of the firm.

In addition, a document prepared by your former employer to calculate the tax to withhold on your payment only takes into account your period of employment as director of the firm.

It is recognised that you have prior periods of employment with the employer however it is clear that the payment is calculated with reference to, and relates only to, your role as director of the firm. The payment does not take into account your previous employment with the firm.